1. True North

    Steady as she goes

  2. February 2021

    The value of any investment can fall as well as rise and investors may not get back the amount invested.

  3. True north, in this case a long-held approach to through the cycle investing, provides a fixed point to steer by in uncertain times.


    Driven by unprecedented fiscal and monetary stimulus and vaccine success, markets recovered quickly in 2020 following the outbreak of the Covid-19 pandemic. Credit markets are now priced optimistically, assuming herd immunity will be achieved over the summer of 2021, a seamless transition from fiscal stimulus to private sector recovery, and the continued maintenance of extensive policy support. However, as always, there are risks to the downside.

    A slow and inconsistent roll out of the vaccine could result in the extension of restrictions, putting further pressure on corporate balance sheets. Over the longer-term, companies may not be able to rely on as much support from governments and central banks. These risks have led to concerns about a new default cycle in some quarters.



    Active, through the cycle investing

    It’s the role of our fund managers to set our portfolios up to weather whatever comes their way. The team seek to deliver a sustainable, long-term income for clients, not short-term yield. They do so by focusing their analysis on the resilience of the companies they lend to. In periods of uncertainty, this philosophy has been rewarding. Our range of credit funds saw a very limited impact from defaults throughout 2020, thus maintaining our long record of experiencing significantly fewer defaults than the market. We remain confident in the resilience of our holdings as we start the new year. Given the particular nature of this economic shock, emanating from a public health crisis beyond any company’s control, we continue to see a lot of support and forbearance for companies across many sectors which is keeping default rates lower than they otherwise would be. Default rates in 2020, of around 5% in Europe and 6% in the US, whilst higher than in benign market conditions, are well below the levels we’ve seen in previous financial shocks.


    Our approach

    The big question, which will play out over the next few years, is this; will the companies which have burned through cash and increased their borrowings in order to keep the lights on, be able to grow sufficiently quickly to manage their debt commitments? 

    Not all companies will.

    Some will therefore need to either raise equity (if they can), or face default at a later date. Our forward-looking analysis assesses our holdings against a range of possible company-specific futures: they are not simply limited to a set of macro-economic forecasts. We will therefore only lend our clients’ money to companies that are either very unlikely to require additional capital raising or will be in a sufficiently strong position to raise capital, if and when required.



    Resilience Overcomes

    Companies with resilient characteristics can be found in some of the most unlikely places. For example, within the hotels sector, we own bonds from Europe’s leading hotel group, Accor. The Mercure, Fairmont and Novotel parent company had some €4.5bn of liquidity at the end of June. Our rigorous analysis suggests that is enough for the business to survive for at least two years, on the extreme assumption of market conditions equivalent to those we saw in March 2020. In a market dominated by small, independent operators, Accor’s deep pockets will enable the company to seize acquisition opportunities at distressed prices and further grow its market share. Over the long term such success is likely to result in a reduced risk premium and a positive outcome for the bonds. 

    Another example is Heathrow; London's premium airport and one of Europe's largest airport hubs. Although air travel is likely to remain subdued through to 2022, we believe Heathrow's strong liquidity position, supportive shareholder base and premium location give the airport a significant competitive advantage. As a result, Heathrow is well positioned to take market share from other London airports. We expect this highly resilient business to overcome extreme market conditions and perform strongly in the long term.


    Looking Beyond the Horizon

    Our Fixed Income teams can continue to profit in these uncertain times. We can do so by exercising the discipline of a long-term approach, our true north, which gives us a fixed point to steer by regardless of what is on the immediate horizon. We are actively selecting the resilient companies of the future. Owning a global portfolio of such businesses, we believe, offers a terrific opportunity for future growth in both income and capital.


    Accor and Heathrow are issuers we hold in various Baillie Gifford Income strategies. They both feature in the High Yield and Strategic Bond portfolios.

  4. Actual Investors
    look to the future.

    Not the past.


    The views expressed are those of the Income strategy teams and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.


    Stock Examples

    Any stock examples and images used are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.

    This content contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.

    Past performance is not a guide to future returns.


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